Saturday, March 25, 2023

Are ad-driven business models bad?

There's been a lot of discussion that ad-driven business models are inherently exploitative and anti-consumer. I think that's both wrong and not a helpful way to look at how to fix the problems in the tech industry.

I think the problem with ad-driven models is that it's easy and tempting for executives to use short-term metrics and incentives like clicks or engagement. It's the wrong metric and incentives for teams. But I think the problem is more ignorance, or willful ignorance, of that issue.

In the short-term, for an ad-supported product, ad revenue and profitability does look like ad clicks. In the long-term, ad profitability looks like converting performing ads for advertisers over the lifetime of customers. Those are quite a bit different.

With subscription-driven models, it's more obvious that your metrics should be long-term. With ad-driven models, long-term metrics are harder to maintain, and many execs don't realize they need to. If execs let teams optimize for clicks, they eventually find those clicks have long-term costs as customers start leaving, but unfortunately it's quite costly to reverse the damage once you're far down this path.

In the long-term, I think you can improve the profitability of an ad-driven platform by making the content and ads work better for customers and advertisers (raising ad spend, increasing ad competition for the space, and reducing ad blindness) and by retaining customers longer (along with recruiting new customers). That looks a lot like the strategy for increasing the profitability of a subscription-driven platform. So I don't see much of a difference between ad-supported and subscription-supported business models other than the temptation for executives to inadvertently optimize for the wrong thing.

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